Todd Pinkerton

Financial crisis is about psychology, not economics*

todd — Tue, 07 Oct 2008 21:05:16 +0000

Dan Ariely, behavioral
economist

*ok, so maybe it’s still partly about economics. But a recent talk by Dan Ariely shed some light on the quirky, human aspects of our financial decision-making.

A few days ago I saw Dan Ariely speak at MIT as part of the Media Lab’s Center for Future Banking. The Center is sponsored by major banks like Bank of America, so in that context Ariely spoke about his research and how it relates to the current financial problems we’re facing.

Ariely is known as a ‘behaviorial economist’, which is to say he studies how people relate to money. I’ve been following his work for a few years now, but recently he’s been getting a lot more attention for his book Predictably Irrational and regular NPR radio series.

So Ariely’s big thesis is that we incorrectly assume people behave rationally, always acting in their own self interest and maximizing their personal gain. As a society we enact policies that assume these economic principles. For example, we increase penalties as crimes get bigger, because we assume people will weigh the risk vs. reward and decide the increased jail time is not worth the payoff.

But reality is different. People do not always behave rationally, especially when money is involved. And here is where we get to the current events surrounding the ongoing financial meltdown.

Ariely’s experiments show that people will cheat or steal, but how much they steal is not determined by external factors as much as it is upon our own self-image. We steal as much as we can as long as we can look ourselves in the mirror. As much as we can rationalize, as much as we can justify stealing that is how much we will.

One experiment involved having participants complete a quiz, and then self-report the number of completed answers. The participant was then paid $1 for each answer. It was obvious one could cheat; the question was, would they and how much?

The control group averaged 4 completed questions, worth $4. The test group averaged $7, implying that they self-reported 3 more questions than they actually deserved. Test subjects were also more likely to cheat if someone (an actor) obviously cheated from the start — they would just follow his lead and cheat in the same fashion, as if the actor was validating their actions.

Another test tried substituting tokens instead of cash. The idea was to see if people are more likely to steal if they are stealing things that do not remind them directly of the monetary value of what they are stealing. Tokens, credit card numbers, etc. As it turns out, Ariely’s experiment shows that people are more likely to steal the tokens — which they can exchange for cash just a few feet away — than they are to steal the cash directly. It is more abstract, we can rationalize it to ourselves easier, and we can deny that it is really stealing anything of value.

How this applies to Wall Street is pretty obvious. Take executive compensation, and the back-dating of stock options. Stock isn’t real money (although it can be sold immediately and electronically for cash in your bank account), so that becomes easy to rationalize. Stock options aren’t even stock, they are a ‘right’ to purchase, so that is even easier to rationalize as a non-valuable good. And in the case of back-dating options, we’re not even talking about executives stealing or giving themselves more of those — just changing the dates around a little. In this light, we can see how executives who engage in this illegal practice can justify and defend these actions as “not really stealing”.

Other psychological links to the financial world:

People want to see the banks that made poor lending decisions suffer — even if it means they have to hurt themselves (by paying) in the process.
Business students are taught how important diversification is, and yet still concentrate a lot of their own worth into their own company’s stock — like Bear Sterns, which later collapsed.

Read more about Arlely and his research on the Predictably Irrational site, or get the book at Predictably IrrationalAmazon.

The Tweet Shall Inherit the Earth

todd — Fri, 15 Aug 2008 03:07:07 +0000

I hate talking about Twitter. Everyone has their opinion — “Twitter will be such a hit it will absorb Google”, or “Twitter is a flash in the pan only used by web 2.0-type techies”. So to blog about Twitter really doesn’t make me very happy.

But.

I think there is a bigger conversation to be had. A conversation which is only a little bit about Twitter. Bear with me.

Twitter is often referred to as ‘a micro-blogging platform’. Users are asked the simple question, “What are you doing right now?”. The answers are as varied as the people that use it. From the mundane (”eating lunch”) to the useful (”eating lunch at http://localcafe.com ; try the reuben!”) Users ‘follow’ other users, whether they are friends or just good tweeters who post interesting content.

Now, why is twitter so popular? And here is where it gets interesting:

Twitter is popular precisely because it asks so little of its users.

To maintain this blog (which I do a terrible job of, even when I’m trying) takes quite an effort. I need to host my blog somewhere, I need to choose a layout and title, categories etc. And then I need to think of something interesting to write about, and write an article. I usually have to research links to related content I want to include in my post. I’d say I spend about 30 minutes on every entry I write — which is probably why I don’t write too many.

But Twitter…

Twitter users contribute because they don’t have to do too much. Participating in Twitter takes next to no effort — just write one line. In fact, that’s about all you can do. But over time, you get better at creating interesting content because you see other people do it (those people you follow). And you can respond to other tweets, which is much more direct than commenting on a blog.

So what is the bigger picture here? If you have a web property — a ’social network’, say, or a dating site, or any app that asks users to contribute anything at all — find ways to let your users participate with as little effort as possible. Facebook does this with the status message, which is probably the thing I update more than anything else — simply because it takes 2 seconds and little thought or effort to say what I’m up to. Its big bang for little effort.
There’s an old saw about “2% of the users create all of the content for the other 98%”. If you have any interest in getting more users to participate, think about how to make it as easy as Twitter. Let them ask a simple question. Take a poll, post a comment. The less effort involved, the more likely you users are to create something.

get it done — managing your projects

todd — Sat, 02 Aug 2008 19:28:01 +0000

In a typical startup, The Management (even if its just you) often wants to do lots of different things at the same time. This is difficult, because you have limited time, people, money, and other resources to carry out all these initiatives. Here are some ways you can get all those projects under control.

Create a charter for each project. This is a simple 1-page document that simply describes why you’re doing this project (the business goals). It also lists the project’s Sponsor, the person you go to for money or resources and whose neck is on the line to get this project done. The charter lets everyone on the team know what the project is all about, and is the guiding force in making decisions. All the work done on the project should support the reasoning in this document. It also includes success criteria, so the team knows what the desired outcome is — whether to lower the amount of time spent waiting for customer support, or increasing revenues by providing a new paid service for your users. This should be quantifiable and measurable, so you know whether the project has achieved success. There is a template with Johanna’s book, but its more of an outline. I’ve created a project charter template based on hers, that uses a fictitious project to illustrate the concept. Feel free to use it.

Projects are about people. Get to know your team. Also get to know your stakeholders, your sponsor, and identify any champions (those cheering for your project’s success) and anti-champions (those who want you to fail!). Spend time understanding what makes these people tick, and what they want. IT projects are different because they involve organizational change, so you need to understand who is affected and how, to smooth the way for your project to be accepted. You may have built a great product of feature, but what if your internal customers don’t want to adopt it?

Create a scope statement. Know (and document) what is in scope for the project, and what is out. Ensure the team delivers what is in scope — no more, no less. In fact, enumerate what is out of scope in your scope statement doc, just to be clear. If you’re building a helpdesk application for instance, mention that it DOES include a web interface, but DOES NOT integrate with the legacy system already in place. It’s very likely that your team will have different ideas about what they expect to be in scope and out.

Monitor the health of your projects. Create a project dashboard, like the one used in the 7 Keys for Project Success. Each week, update it with an objective assessment of your projects on the seven criteria. For the keys that are ‘red’ for your project, create some recommendations to fix the problem. When done right, this dashboard lets you go to your management with solutions, not problems.

Johanna Rothman is a big proponent of these techniques, and I found her book Manage It! to reinforce a lot of what I learned in the Harvard Extension course on IT Project Management. There’s a lot of nuance to successful projects, but if you can at least do these things at a minimum, you’ll better your chances of success.

from powerpoint to webapp

todd — Wed, 02 Jan 2008 01:20:32 +0000

In my consulting career, I’ve been fortunate to see similar problems multiple times — hopefully, I’ll learn from each one and not make the same mistakes the next time I encounter that particular situation. One situation in particular involves a conversation with an entrepreneur, and it goes something like this :

Entrepreneur: I have an idea for a web app that will revolutionize the [blank] industry, and make us bajillions!

me: That’s great! I can tell you are passionate and excited, and that’s critical to your success. But do you have enough cash to pay for this coffee?

Entrepreneur: Yes, we have some funding to get started. And I have a business plan explaining our strategy, and I have a powerpoint deck of what the product does.

Me: That’s even better! I’ll have another espresso then.

Entrepreneur: We’d like you to get us started on our website development. Here’s our feature set for beta release. How long is this going to take? How many people, and what other stuff do we need?

Me: Ummm….and that’s where the conversation gets difficult. Because the business plan doesn’t go into great detail about the product (it shouldn’t), and the powerpoint slides have a bunch of boxes and arrows but don’t show what the screens look like or what actions the user takes, we can assume the founding team hasn’t thought much about how people actually use their product.

So at this point in the conversation, I face an uphill climb. I have to explain to (and convince) my client that they have a lot of hard work figuring out how their users are going to use this tool to accomplish their tasks, what those steps are, and what they look like. I have to tell them I don’t know how long this is going to take, and I doubt anyone else knows either.

Most of these conversations end with me suggesting some homework for the founders. It’s kind of a toolkit of useful things that you probably need, but it’s definitely not everything you need. But it’s a start.

read “Getting Real“, the 37signals book. PDF, online, or print version, I don’t care. Read it, and know it. When in doubt, consult this book. When not in doubt, consult this book and make sure you are still on the path. I hate to use the word ‘bible’, but it’s the closest thing we have. It lays out the process of building a web product, from concept to delivery and beyond. If you’re under 25, I guess you can real Paul Graham too.

setup a server on slicehost for development (for rails, anyway). Easy, cheap, and upgradeable.

likewise, set up a subversion repository to hold your source code on svnrepository.com. You could host your own, but I like the peace of mind I get knowing my source is backed up and secure. As a bonus, you get a Trac instance for bug tracking, and it includes a wiki and other tools to make developing your web app easier.

hire a designer, probably a freelance one, to draw some wireframes for you. Give them lots of your time, because that’s how you’re going to figure out what exactly your app does. This is probably the most important person on your team right now, and you should be focused on this. Ideally you can find a good reference through your network, but if not post a well-crafted ad on craigslist and look at their portfolios.

At the same time, you probably want a developer to start working on your site. Maybe the developer came first, and she’s found someone designer-y to work with — even better. Just get some stuff down on paper so you can discuss it, scrutinize it, see what works and what doesn’t. If your designer is good, and you’ve spent enough time with them describing what you want, they should have something workable.

Start building your product. Get your developer, or outsourcer, or nephew or whatever to hack some code.

Your developers are probably following some sort of Agile process like Scrum. You should be seeing new features and changes on a daily or weekly basis. This is important, so you can play with your app as it is being born and give some feedback, change it, and make it better. If you’re waiting weeks or months before peeking, you’re doing it wrong. Good chefs taste as they cook.

Once you have something you like, and works, and does what it’s supposed to, consider doing a limited release. Announce to your friends and families, have them play with it, ask for their feedback. If you can’t get your loved ones to pay attention to something you’ve been slaving over, well, that’s not a good sign.

While you’re at it, put some site monitoring on it like site24×7.com — so you’ll know if you get swamped with too much traffic from Digg or Slashdot or nytimes.com, should they write about your site.

Go slow. look how your userbase is growing, if it is at all. Get some more users — email more friends, or blog about it, or buy a few Google ads. Setup Google Analytics to track visitors to your site, and learn what is working and what isn’t. Measure, always measure.

Get more feedback. Listen to your users. Make them happy. As your userbase starts to grow, spend some time thinking about how you can handle the extra load.

… and that’s about it. You’ve just built and launched an app. Hopefully, you have some users and they like it,maybe even willing to pay for it. Maybe it sucks, and is a stupid idea. But more likely, it works, has some flaws, and could use some work. So work on it. Improve. Iterate.

Of course, what is considered ‘best practices’ today may not be the preferred methods of tomorrow. So I read a lot to stay on top of where the industry is going. A have a million feeds in my Google Reader account, but only a handful I consider invaluable — including TechCrunch, Found+Read, Read/Write Web, and Signal vs. Noise.

Guy Kawasaki — the $12k blog

todd — Fri, 30 Nov 2007 16:58:22 +0000

I’ve long been a fan of Guy Kawasaki. From the early days as Apple evangelist, to his current role as early-stage VC, Guy has always had keen insight into technology and social trends. He’s written a few books with some practical advice on building successful companies, drawing upon his own experiences in the trenches.

Guy preaches what I have understood for a long time: the cost of starting a web company has dropped dramatically in the past 5 years or so, to the point where the economics of funding and launching a startup are drastically different. Old and busted: $5M in series A VC funding, years of technology development, then hopefully some revenue. New hotness: bootstrap on credit cards or angel investors for <$100K, launch in 3-6 months with immediate revenue, and hopefully positive cashflow soon after.

The evidence that Guy holds up for these trends, to say "all of this is true, and here's how I took advantage and launched something big on a shoestring budget" , is his site truemors.com . Truemors is a news site with various categories (business, gaming, health, etc) and content submitted by readers. It sports a digg-like ‘X users interested’ scheme for users to vote up their favorite stories. And there’s some editorial posting at work too, by the staff of ‘truemorists’ inside and outside the company.

Guy claims (and I believe him) that the Truemors site was launched on a $12K budget. He marvels that this is orders of magnitude less than dot-com era startups, and credits open-source software and easy hosting providers in making this all possible. And he’s right.

But it’s a blog, Guy. A freakin’ blog.

Now, it’s a pretty cool blog. It has some nice features, like being able to post by phone or email. And it certainly ‘democratizes information’ , such that “the many can create too”. This is all great, and it’s probably a good business in that you get plenty of traffic to monetize via ads on the site.

But it’s still a blog. Guy even tells us it’s built on Wordpress (as is the blog you’re reading now), and he spent as much on legal costs as on the software development. You can probably guess that this blog, although not as well-designed, technologically advanced, or revenue-generating as Trumors, was launched on a much smaller budget.

Now don’t get me wrong, I’m not going to advocate spending millions on building a product when you can spend a few hundred — this is just good business sense. But what exactly am I supposed to marvel at? That it *only* cost $12K? I wonder why it didn’t cost less than that? Really, do I need to invest even $12K to launch a profitable blog site? If that’s the barrier to entry for this most virtual of industries, it’s too high. Why can’t a high-school kid with an idea for a niche news site (again, leveraging existing tools like WordPress) get started on his allowance money? What does it say about the state of innovation if we need to spend 80% of our startup costs paying off a lawyer to file incorporation paperwork?

Guy argues that a good lawyer now will save you trouble down the road. That uncle of yours who is a divorce lawyer might not understand all the nuances of setting up a c-corp to handle your high-tech blog company. That if someone wants to buy you later on, they’ll discover you’re clueless because your legal i’s are not dotted and t’s crossed.

This is probably true, but I can’t help but wonder why. And since I can’t change it, I should probably just suck it up and pay the legal ransom. And great lawyers, esp in media and technology, can provide introductions to investors and partners and help your company out in amazing ways. But if I want to do something so run-of-the-mill these days as start a company to publish a blog and take in advertising dollars, why should that cost so much in legal fees? When that exact same process and knowledge was used on countless identical clients before me — no new research was needed, no new legal techniques discovered. Why aren’t we leveraging that?

In reality, what ensured Truemors success wasn’t the technology base of Wordpress and MySQL and reliable interweb hosting. It wasn’t the $5K in legal fees that Guy paid the top-tier Silicon Valley firm to file his paperwork. It was Guy’s reputation and popularity, which ensured a wide readership of whatever he published, a reputation built over decades in the industry. Guy is a brand, an icon, and without that Truemors would not have garnered much of the attention it now deservedly holds.

So we’re back to square one — $12K is too high of a ‘floor’ for launching a web startup, and it’s too little in terms of the equipment you need — namely, some brand recognition or other competitive advantage (content, technology, etc) to make your site rise above the noise.

At heart, I think Guy is right about the trends, and right that the barriers are far lower than they used to be. But I’m not sure Truemors embodies all of this, simply for the fact that it’s unique to Guy’s situation. Other entrepreneurs will take very different paths to arrive at a similar destination — some will use less cash, others will have more or less brand recognition. But they will all benefit from a marketplace that is drastically different than it was even 5 years ago, when these opportunities were mostly out of their reach.

Google Android phone SDK launches

todd — Mon, 12 Nov 2007 20:25:20 +0000

Today Google made available the Android SDK, which makes it possible for developers to build applications for the Android open handset platform. There is a new section for Android on code.google.com, and a video showing off the capabilities of the platform.

I haven’t yet installed the SDK, but it looks promising. Google also announced a $10M prize purse for developers building Android apps, although I’m not sure the fires really need all that stoking — the media buzz around this platform has captured enough interest that I’m sure we’d see some amazing handset apps even without the prizes.

If you haven’t read my previous post, be sure to check out the Android demo at the upcoming MoMo Boston event.

gPhone at MoMo Boston

todd — Sun, 11 Nov 2007 22:01:36 +0000

Next week (Nov 13) my good friend Alan Blount will be demonstrating what the press has been calling “the gPhone”, or “Google Phone”. In reality, what Google has been working on is the Android mobile phone platform and SDK, not a specific phone. Also in the discussion is the Open Handset Alliance, the industry organization (including tech and mobile companies) to bring about a better user experience by leveraging the Android platform.

The event is being held in conjunction with the Mobile Internet World conference in Boston — free passes are available, details on the MoMoBoston site. This may very well be the first time the public gets a glimpse at the Android platform, so it should be a fun evening.

weekend events

todd — Sun, 11 Nov 2007 21:23:29 +0000

I feel like it does little good to blog about events after they happen. But better late than never, right?

This weekend was Harvard Business School Cyberposium 13, a conference of technology and business leaders. It’s interesting in that the entire conference is organized by students, and draws a pretty diverse crowd of MBA-types, tech-types, and startup entrepreneurs.

The Philip Rosedale (founder of Linden Labs, makers of Second Life) talk was more interesting than I expected. His talk walked us through the virtual world of Second Life, as he described how the simple rules of the world led to some very interesting emergent behavior when the user population began to grow. For example, SL users can earn real money by creating and selling virtual goods within the SL world, to a truly global marketplace of buyers. Unlike the web there are no currency or language barriers, since SL has its own currency and a visual mode of interaction.
I didn’t stay for the whole conference, instead I wanted to see John Palfrey speak at the Leadership Institute on the other side of campus. Palfrey heads the Berkman Center for Internet and Society at Harvard Law school. He’s been involved with internet and intellectual property law, which is how I met him during the S-DMCA hearings on Beacon Hill. But he also does some interesting research with his group at the Berkman, which I would call “social media” — how the internet and related technologies are changing the way people communicate and interact. Blogs, social networks, podcasting, RSS — the Berkman examines how all of this is affecting and changing our culture.

So Palfrey gave a talk to the Harvard Leadership Institute, about some of his own personal leadership stories. One such story was about how he was elected co-captain of his squash team, even though he was the worst player, and how he had to lead by example (playing well). Another was the idea of “managing up” when he worked as a political campaign manager, and how to push back instead of trying too hard to please. These are very familiar concepts to me, as I’ve hit my head against them numerous times. He also mentioned the importance of selling, as that is often what a job entails (even when you think it doesn’t). I’ve been thinking a lot about that lately, and how beneficial those skills would be in many careers.
He segued from that into a discussion about his new book Born Digital , about the generational differences in how we relate to technology. It was a very interactive session, which I always prefer with such an engaging speaker. He was teaching Internet and Society: Technologies and Politics of Control” at harvard extension, but it looks like someone else is teaching that course this spring.

web brainstorming with wireframes

todd — Mon, 29 Oct 2007 00:56:18 +0000

I’m not a designer by training — in fact, I can barely draw stick figures. But often on a project I need to start laying elements out on a page and seeing what works, and what doesn’t belong. I used to do this on paper, which is quick and easy to iterate. Then, start mocking up the layout in HTML. All this is just to get the features and placement right, and leaving the visual design for a professional.

The problem with this approach is, there’s a huge gap between paper-prototype and HTML mockup. Paper is quick and easy, but not very compelling to look at. HTML looks better, but it’s not very malleable — once you place something, it’s often a pain to move it around and get it right again.

So I’ve started using a drawing tool to do these wireframes. I may sketch something out on paper first (because that is still the fastest), but before I share it with anyone, I’ll open up my drawing program and draw boxes and text on the screen. I’m on a Mac, and so far the best tool I’ve found for this is OmniGraffle Pro. Usually used for drawing flow charts and the like, there are some add-ons that make it great for wireframing. Like the OmniGraffle Web Design Template by Michael Angeles. He also has a wireframe palette containing a bunch of useful shapes and text, and a greeking stencil for ‘lorem ipsum’ text.

Using these tools, you can draw some useful mock-ups of web pages for your next project. I do not know my way around Photoshop or Illustrator, but I am fairly comfortable using OmniGraffle with these extensions after only a bit of trial-and-error. Now I can create drawings and mail them around to colleagues without fear of them laughing at my stick figures.

OmniGraffle is a commercial product, but you can get a trial for their Pro version. You need the Pro to take advantage of the plugins I linked above. It’s about $99, so it’s far more affordable than Photoshop and other art-oriented drawing programs.

BetaHouse in NetworkWorld

todd — Tue, 23 Oct 2007 18:13:48 +0000

BetaHouse, the co-working space I am involved in, was featured in this NetworkWorld article on the rise of co-working. BetaHouse co-founders Jon Pierce and Greg Gibson were interviewed and talk about the benefits and challenges of working in such an environment.